General Electric Company Earnings: Can Its Industrial Business Keep Growing?

General Electric has returned to its roots, but will it still produce the growth investors want?

On Thursday, General Electric(NYSE:GE) will release its quarterly report, and the company has worked hard recently to pull back from its emphasis during the 2000s on its financial business and to reestablish itself as an industrial giant. With soaring prospects from aircraft manufacturer and aerospace partner Boeing as well as budding businesses in energy and mining equipment that could in time rival Caterpillar and other industry players, General Electric is capitalizing on the upturn in the economy. But could that strategy backfire if economic growth disappears?

General Electric went to the brink of collapse during the financial crisis, having overextended itself and left its business needing to resort to extraordinary measures just to get the capital it needed to survive. Having learned its lesson, though, it has moved sharply away from its GE Capital division and other non-core businesses, instead taking on the strategy of making the most of cyclically sensitive industries while they're in their boom phases. How long can General Electric keep growing with that long-term vision? Let's take an early look at what's been happening with the company over the past quarter and what we're likely to see in its report.

Will General Electric earnings continue to expand?In recent months, analysts have ramped back on their expectations on General Electric earnings, cutting their first-quarter estimates by $0.02 per share and their full-year 2014 projections by a penny per share. The stock has suffered some modest losses, falling 5% since early January.

General Electric's fourth-quarter results show how far the company has come in deemphasizing its capital division. Although GE Capital still provided about a third of its profits, the industrial side of its business has truly bloomed, with its power and water and aviation businesses making up nearly 60% of the profits that General Electric's industrial division earned. Aviation and oil and gas grew by double-digit percentages in 2013 compared to the previous year, with its business of making engines for Boeing and other aircraft manufacturers bearing fruit in a strong commercial-aircraft environment. Even with some concerns about how long the economic recovery might last, General Electric is in a good position to make the most of some of the economy's healthiest industries.

In its latest effort to move away from finance, General Electric recently said it would do an initial public offering of its North American retail finance unit, calling the new company Synchrony Financial. At first, it plans to offer about 20% of the business to outside investors, holding onto an 80% stake temporarily in order to avoid a massive drop in profitability. Then, by next year, it will spin off that 80% stake to its own shareholders, giving investors a choice to hold onto their Synchrony shares or sell them. The timing of the IPO could prove very good, as General Electric tries to capitalize on the positive credit environment here at the top end of the business cycle.

Source: General Electric.

Instead, General Electric has embraced the power of innovation. With initiatives like its GE Ventures in Silicon Valley, it hopes to stay ahead of more traditional tech companies in making sure it uses state-of-the-art technology in its manufacturing processes. By looking at ideas like the Internet of Things, it can offer what customers will demand in the future, rather than having to play catch-up after the fact and hope that its customers will be patient enough to wait for it.

All of its efforts have improved General Electric's finances. Thanks in part to a favorable market, the company has cut its pension plan underfunding by nearly two-thirds in just the past year. That could slash benefits costs in the years to come, helping General Electric avoid one-time charges and bolstering its profitability.

In the General Electric earnings report, watch to see where the conglomerate gets its profits and where it focuses its attention. As long as the economy keeps growing, General Electric will be in a good position to expand in whatever direction it deems most lucrative.

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Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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